Even in a perfect world—say, Missouri in the mid-1990’s—enhancing pension benefits for teachers creates winners and losers. A new report on Missouri’s teacher pension system shines a light on just how stark the difference is—and how damaging these changes will be for the teaching profession overall.
From 1995 to 2002, Missouri implemented a series of retroactive benefit enhancements to the state pension system including early retirement provisions, increases in the cost of living adjustment, and critically, an increase to the percentage of teachers’ final average salary they receive as their pension. For senior teachers close to retirement, their contributions did not pay for the increased pension they would receive. And because they were at the end of their career, they were also very likely to retire within the system and take advantage of the pension increases.
New teachers, on the other hand, had decades of contributions ahead of them to pay for the increased pension payouts. New teachers were also more likely to leave teaching or move to another area—which would mean that they would have contributed to the communal account without receiving their full payout upon retirement. The difference is huge.
Factoring in the probability that a teacher will leave teaching or move to another state before she retires and receives her full pension, this is how much a teacher will expect to gain from the pension enhancements:
- A 24-year-old teacher in her first year of teaching will expect to gain $12,627.
- A 53-year-old teacher with 29 years of experience will expect to gain $83,495.
The senior teacher has no risk of not receiving her full pension because she is already eligible for retirement. She will take all the benefits, and the first-year teacher will carry all of the liability.
And, of course, it’s not a perfect world. When market returns could no longer support the promised enhancements, contributions had to rise to account for the more generous pensions. The contribution rate increased 1 percentage point per year from 21 percent in 2005 to 29 percent in 2012. Teachers shouldered half of the increase; the state contributed the rest. Adding in the contribution increase to the calculation, new teachers in 2012 now have a decrease in their net pension wealth by $6,783.
Unfortunately, many new teachers likely don’t understand how a pension system works and their role in supporting the system. Pension enhancements aren’t a recruiting tool for new teachers; they’re perks for existing teachers. New teachers aren’t lobbying at the statehouse or asking their union representatives to present their concerns—they’re learning how to encourage their 2nd-graders to raise their hands instead of yelling out. But in the future, when retirement stops being an abstract concept and starts being a real goal, those teachers will discover the truth and use it as another reason to discourage their students from entering teaching.
One small step states should take now: provide teachers with clear and accessible information about their pensions. As we wrote in an Education Sector report, 401(k) plans provide participants with regular updates on their contributions and expected retirement earnings, while state pension systems may not be as transparent with their participants. Requiring that pension systems communicate regularly and clearly with their participants is an important first step to defusing inevitable anger and ensuring that all teachers are treated fairly.
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